A group of researchers did a study on Brazillian day traders between 2013 and 2015.
They wanted to find out how many % of traders made money consistently.
And do you know what they found?
- 97% of them lost money
- 0.4% earned more than a bank teller (about $54 per day)
- The top trader earned $310 per day
Clearly, the odds are against you.
So what now?
Well, that’s why many traders hop onto the copy trading bandwagon.
After all, you’re thinking:
“Since trading is so difficult, then why don’t I follow the trades of a pro trader—without having to figure things out on my own?”
From the look of things, it makes sense, but there are a few “hidden” pitfalls that nobody tells you (and I’ll cover more later).
What is copy trading and how does it work?
Copy trading is when you follow the trades of another trader.
So when the trader buys, you buy. When the trader sells, you sell. When the trader adjusts his stop loss, you’ll adjust it as well.
Here’s how it works…
There are 2 types of account in copy trading:
- The master: This is the person who makes the trading decisions
- The follower: This is the person who copies the trades of the master
Also, the masters and followers are on a platform (like Etoro and Darwinex) which facilitates copy trading—and it’s how they connect.
I know you’re excited to fund your copy trading account and copy the trades of other professional traders.
But before you do so, here are some things about copy trading you must be aware of.
Copy trading: Why you won’t have the conviction to copy for long
Here’s the deal:
You’ll never know who is the person that you’re copying your trades from.
Sure, they can give some short biography about themselves, how they trade, etc.
But how do you trust their trading strategy if you have not validated it yourself?
Because when the drawdown comes (and it definitely will), you’ll start having thoughts like…
“What’s going on?”
“Does copy trading work, or have I been lied to?”
“Did the trading strategy stop working?”
“Should I still copy the trades after 5 losers in a row?”
Now, these questions are impossible to answer because you didn’t develop the trading strategy. Instead, it’s copied from another trader and that puts you in the back seat.
Do you agree?
Beware of transaction costs and fees
Copy trading is a business.
So, if you’re not being charged any upfront fee, then you’re paying more for the spread and overnight fees.
For most Forex brokers, the spread on EUR/USD is 1 pip. But on a Forex copy trading platform, you might pay 2 to 3 pips more.
But don’t take my words for it because you can compare the spreads of a normal Forex broker with a copy trading platform and you’ll see the difference.
So, what’s the implication of Forex copy trading?
#1: If you’re a trader being copied, then bear in mind your trading strategy won’t work as well because you’re paying more in spread (compared to a typical Forex broker).
#2: If you’re copying another trader, then it’s best to follow traders who trade infrequently so the spread doesn’t eat up a huge chunk of your profits.
Now, the spread isn’t your only cost because you still have to consider overnight fees (if you’re holding positions for longer than a day).
This fee is calculated by taking Libor + X%.
(Libor stands for inter-bank offered rate. It’s an interest rate that banks charge to other banks for borrowing the money.)
So, what is X?
Well, this is the mark up that’s determined by the copy trading platform and you’ll need to check with them for the exact amount.
The good news is, you don’t have to worry about calculating all these because the platform will likely do it for you—so do check it out before placing a trade.
Now, there are probably other fees to consider but the spread and overnight fees make up the chunk of it.
Beware of a possible conflict of interest
As a master trader, you get paid more as your number of followers increase (that’s because you have a larger amount of assets under management).
So the golden question is…
How do you increase your number of followers?
One technique is to adopt a high winning rate trading system (like having 500 pips stop loss and 5 pips profit target).
Clearly, with such a trading methodology, your equity curve will be sloping higher for a long time— which will entice new traders to follow the master.
But there’s a problem with this.
It’s only a matter of time before the trading system encounters a loss and wipes out all the earlier gains (or more).
And by the time it happens, the master trader would have already profited from his “fees” and the ones left suffering are the followers.
Now, I’m not saying all masters are bad, but you must be aware of this possible conflict of interest.
And if you see an equity curve sloping “too nicely”, that’s usually a cause for concern.
How to find copy trading success?
So is copy trading profitable?
Can you be successful at it?
At this point, it seems that I’m against copy trading—and you’re right.
Still, if you want to go down this route, then here are some tips to help you…
#1: Understand the concept behind the trading strategy
When you understand the concept behind a strategy, you’ll know why it makes money which helps you stick to it.
Trend following works when markets are trending. But statistically speaking, most markets trend less than 50% of the time.
This means you’ll lose often, but when you catch a trend, your profit will more than compensate for the little losses you incurred along the way—and that’s how a trend follower makes money.
Now if you don’t understand the logic behind trend following, then you’ll claim it doesn’t work after a few losing trades.
But if you do, then you know it’s simply the cost of doing business.
#2: Know the person you’re copying from
In the venture capital world, some firms get funded not because they have a good product or idea. Instead, they get funded because of who’s running the company.
And this concept can be applied to trading.
Let me explain…
I’ve got a friend who’s into Algorithmic FX trading. The way he trades is by having a wide stop loss and small target profit. If the market moves against him, he’ll average into his losses so he can quickly recover back when the market reverses back in his direction.
This works for him because he risks less than 0.5% on each trade and if he is wrong on a trade, he’ll average into his losers so he can quickly recover when the market reverses back in his direction.
To be honest, I’m not in favour of such a trading strategy.
But because I trust the integrity of my friend more than his strategy, I’m willing to invest with him.
#3: Diversify your masters
If anyone promises you that you can make money every single day, week, or month—run far away.
That’s because no trading strategy works all the time as market conditions are always changing.
Think about it:
The only way a trading strategy makes money all the time is IF market conditions don’t change—and that’s impossible.
So, what now?
Well, all hope is not lost because you can adopt multiple uncorrelated trading strategies and smooth out your returns over time.
Stock momentum trading works well in bull markets, but during a recession, it suffers a drawdown.
So what you can do is, adopt an uncorrelated trading strategy like futures trend following which usually does well in a crisis period.
This way, your losses from stock momentum trading gets “subsidized” from your futures trend following strategy.
So the takeaway is this…
You want to copy trades from different masters with uncorrelated trading strategies—so you can improve your returns relative to risk.
#4: Find masters who have a stake in it
I’ve got a question for you…
There are 2 identical business out there (A and B) which sells vacuum cleaners.
The owner of business A has 50% of his wealth invested in the business.
The owner of business B has 5% of his wealth invested in the business.
Now let me ask you:
If everything else is constant, which business do you want to invest in?
Business A, of course.
Because the owner has more at stake. In other words, he’ll likely do the right things as he doesn’t want to jeopardize his investment—which is aligned with the interests of the shareholders as well.
So, what has this got to do with copy trading?
You want to identify masters who have a decent stake in their account because they will do what’s right—and this benefits you the follower (aka the shareholder).
Copy trading allows you to follow the trades of another trader.
You must be aware of things of like transaction costs & fees, a possible conflict of interest, and how you’ll have difficulty following the trades of another trader.
Still, if you want to go down the copy trading route, then here are a few tips to help you…
- You must understand the concept behind the strategy, so you don’t give up after a few losing trades
- You have confidence in the person you’re copying from
- You diversify between different trading strategies so you can improve your returns relative to risk
- You identify masters who have a stake in it so there’s no conflict of interest
Now here’s what I’d like to know…
What’s your take on copy trading?
Leave a comment below and share your thoughts with me.
It’s a good place to start if you know what you are looking for and how to get it. Just as you have explained….
Good sharing Rayner, I didn’t realized copy trader shows a great success % based low profit target and high stop loss.
actually.. it depends upon the trader… the ideal trader has a gut to take small lost and capture the big reward. if your master is like this.. i guarantee you that you investment is in the good hand.. you can visit me in etoro at this name.. and you can find what i mean..
My pleasure, Marc!
Hi I wish to know of we may have a chat.
Honestly,copy trading once have failed me,but I was smart to pull out my balance of up to $350 after watching my equity nosedived for two months non-stop,from $500.
Wow, just in time Rayer. I just opened an account with a broker, so I can copy trade. After I read this post of yours, I won’t proceed with Copy Trading. I will just trade the market myself.
Yes I agree that the right trade strategy matter with the master trader, but conflict of interest can be better with what currency pair, please reply.
As always, do your own due diligence. Best!
Biggest problem on due diligence is most ‘successful’ master trader are not totally upfront with their strategy especially on RRR and lot sizes.
For the people who do not have the time to learn how trading works, copy trading is a good thing. Still, you have to choose the right people by looking at their consistent performance, and the risk they take to maintain their portfolio. But I agree with Rayner that if you have your own strategy already, you should do it minimally or not at all.
i glad that mr reyner write this topic.. i happy that you mentioned etoro… and thankyou very much…
what is etoro?
Hi Alexander what are profit/loss on daily weekly and monthly basis. How often do you trade.
Thanks Rayner for the information, Infact you have done great work to enlighten me as a trader. Now I know. Thanks
Copy trading chewed my capital flat!
Hello Irene Kwamboka. How’s your trading? I’m starting off, link up with me. email@example.com. I need to talk to you.
well it is an ok thing but i doubts its for me
I didn’t know about copy trading,thanks to you.Lesson well learnt.
What can you say about prop firms with all the promise to fund trading accounts?
Hi, Rayner! I’m one of your fans. Do you have an account on ETORO? so I can copy you. tyia
I dont think so.. he just stated from his explanation that he is not into copy trading. but I watched most of his tutorial on YT.
Rayner doesn’t offer such services.
Totally agree with you Rayner. There are lots of pitfalls and a lack of guidance on how to copytrade successfully. So I am starting a podcast to help people consider all the decisions they make when copytrading. My belief is that copytrading is a form of investing, not an alternative to it. Therefore it needs to be explored and understood much more than it is currently. I wonder would you ever consider coming on as a guest. I am in Malaysia so no problem with time zones…
Hi Raynier.i am from India.I learn Forex from your YouTube videos.i am a subscriber too.today I lost three fifty dollars in trading.i am in much financial difficulty as well due to covid pandemic.and this lost has happened.i am really dejected.i want to invest with someone like you who can help me.please don’t mind.kindly reply.
Im new to trading. I have a small account on RobinHood and a virtual account on Etoro.
Im considering making a deposit on Etoro and giving the copying a shot.
As of now on my virtual account im doing great and almost all green. The masters ive copied haven’t let me down…. but ive got no cash invested.
Thank you Rayner for all the knowledge you’ve shared with us. Ive read several of your books on pdf and i ordered your Price Action Trading which im about halfway into.
One day Im going to be a great trader and i can say ive learned the most so far from you.
You have a way of making all this understandable. You’re a good teacher! I really appreciate you.
You are welcome, Micheal.
Learn the skills it’s in you!
What intrigued me about Copy Trading was that I felt I had a grip on risk management. However I don’t have the resources right now, time and mental space, to dive into the technical analysis bit.
When I first heard of it I got the idea to apply risk management strategy to traders, treating each trader as a trade in itself. Where I would have to use the data given in their portfolio (assuming that is available on copy trading platforms) and begin to develop a system where determines which traders to copy, when, and what percentage of my equity to allocate to their trades and when to break off. This seemed like something I could develop and learn slowly over time that would be more stable than trying to learn new trading strategies for changing climates. I imagined that with people the climate is stable. Once a strategy is found for identifying good traders I see no reason why it would be subsceptible to change.
I also just got the idea to wonder if it might be possible to avoid the costs involved in using the platform by manually copying trades outside of the platform. For example having a small equity to serve as an anchor to get in on a few good traders and then manually mimic then in meta trader. If that’s possible. But I know nothing about how the copy trade platform works yet.
Most people just want to make money without putting in the effort and are too lazy to do their own research. There are good resources out there that make order books or trading look a bit easier like following whale alerts or CoinLobster but you have to keep and eye out for the new websites.
Thank you for sharing, YYY!
Great article, I 100% agree on everything you said.
Glad to be of help, Gary!